Regardless of the current state of the economy, homeowners default on their mortgage loans and lenders file routine foreclosure actions. In order to understand the overall foreclosure process, it is easier to separate the action into four definitive stages: 1) pre-complaint; 2) complaint ; 3) judgment; and 4) sale. The goal for lenders in this process is the recoupment of their investment, while the goal of the homeowner depends on their situation: abandonment of the property; saving the property through reinstatement or a refinance/payoff; or selling of the property to salvage equity.
Illinois Mortgage Foreclosure Law, 735 ILCS 5/15-1101 et. seq., governs these actions. Illinois is a judicial state requiring court actions to foreclose a mortgage. A myriad of defenses may be available to the homeowner, including the Truth in Lending Act (TILA), Consumer Fraud, and the Fair Debt Collection Act. In reality, barring a violation of any applicable Federal or State statute or regulation, the lender is nearly guaranteed to prevail in the action. Due to statutory redemption rights for occupied residences, a typical foreclosure action requires at least 7 months to completely divest the homeowner of their rights in the property. This time allows the diligent homeowner an opportunity to save their home, or salvage any equity, as their situation permits.
The process of foreclosure begins with the mortgagor/homeowner’s default on the note. The mortgage secures the property to the note, and the property is available to the lender to recover the loaned funds. Defaults generally involve failure to make monthly installments of principal and interest (and also escrow funds for taxes and insurance, as applicable). When this occurs, mortgagee/lenders typically attempt to work out the default through make up payments, but cooperation and compromise by either the lender or homeowner remains a variable.
Following a default, either immediately or after an attempted work out period, the lender is required by the mortgage and note to give a “Notice of Default” and acceleration letter to the homeowner. This serves to notify the homeowner in writing the nature and extent of the default and affords a 30 day period to rectify the default. The lender’s attorneys either receive the file and send the Notice of Default, or receive the file during the 30 day period.
Following the 30 day Notice of Default/acceleration period, the lender’s attorney orders minutes of foreclosure, otherwise known as a title report. As a foreclosure action divests any junior lienholder or claimant of their interest in the property, those parties so appearing in the minutes are named as defendants in the action. Also named are unknown owners and non-record claimants, whose interests are not of record but who may be extinguished following service by publication. The form of the complaint is set by statute, 735 ILCS 5/15-1504. It is important to note that property taxes and certain municipal liens cannot be extinguished through foreclosure. As a result, taxes are monitored closely by lenders during default because a county real estate tax lien can effectively advance ahead of an otherwise valid mortgage lien and terminate it when the tax lien redemption period expires.
Upon filing of the Complaint, service is had by way of a 30 day summons. If personal/abode service is unsuccessful, the Plaintiff’s attorney may publish for service (once a week, for three consecutive weeks, see 735 ILCS 5/2-206 and 2-207). Publication is also effective service upon the unknown owners and non-record claimants. Attendant with filing of the Complaint and service, Plaintiff records a lis pendens, or notice of foreclosure, with the county recorder’s office giving any subsequent interested parties notice of the pending foreclosure. See 735 ILCS 5/15-1503. Prudence dictates that the Plaintiff, upon receipt of its recorded lis pendens, then order a “date down” of title work. The date down will cover the gap between the minutes of foreclosure and the time of recording the lis pendens, ensuring that no other party has slipped in any lien or claim that needs to be addressed in the Complaint by amendment.
Foreclosure judgments, though typically lengthy, primarily establish only two purposes: they set the amount of the judgment; and they establish the redemption period. The judgment amount includes: principal; interest; attorney’s fees; and costs (filing and service fees). Also included in the judgment amount are: title expenses; paid taxes or insurance, if applicable; recording fees for the lis pendens; and any other costs related to securing or maintaining the property.
The judgment usually includes statements/findings concerning the identification of the property, service and default (or summary judgment) against the defendants, and a nearly verbatim recitation of the statutory foreclosure sale process.
Attendant with the judgment plaintiffs may appoint, if they choose and if allowed in the particular county, a private selling officer to conduct the sale. In addition, if the property is vacant and abandoned, plaintiff may seek to shorten the redemption period to 30 days from judgment by way of an affidavit indicating what investigation/observations have been made of the property to support a conclusion that no one is in residence and it is abandoned.
The redemption period, for residences, expires either: 7 months from service; or 3 months from judgment, whichever is later (unless shortened due to abandonment). Upon the expiration of the redemption period, the property may be sold at public auction by the county sheriff (or by an appointed selling officer). Prerequisites to conducting a sale include publication (again, once a week for three consecutive weeks, both in the legal notice and real estate sections [Cook County requires publication in two separate newspapers in appropriate sections]) and notice of the sale to all defendants. See 735 ILCS 5/15-1507.
The plaintiff/mortgagee opens the auction with a starting bid. The amount is usually the same as the credit it holds in the judgment amount, plus statutory interest at 9% and any post-judgment advances for insurance, taxes, board up fees, grass cutting, etc. Some mortgagees always bid their full judgment amounts, while others will make a “competitive” bid based upon the appraised value of the property hoping for a third party bidder, but the final bid, whether from the Plaintiff on credit or a third party by cash, must be commercially reasonable. Bear in mind that second mortgagees or other junior lienholders included in the foreclosure judgment may bid on the credit of their judgment amount, if allowed in the judgment.
Usually the property is “sold” to the Plaintiff/mortgagee for an amount less than or up to its judgment amount. In the rare instance of a third-party bidder, the purchaser must tender (typically) 10% of the purchase price at the sale, and the balance of the funds within 24 hours.
Following the sale, the mortgagee must then obtain an order confirming the sale from the court. See 735 ILCS 5/15-1508. If a sale has been conducted in accordance with the statutory process, and the plaintiff bid a full debt (judgment) amount, confirmation of sale is a near certainty. There are a few statutory exceptions to confirming the sale (paragraph (b) of 15-1508) with generic “unconscionable… fraud… and unjust” language as the main causes to reject confirmation, but otherwise and nearly invariably the court “shall” confirm the sale.
If the sale proceeds are less that the judgment amount, such deficiency is noted in the Report of Sale and in the Order Approving Sale. The deficiency is typically taken in-rem (against the property only), but if the mortgagor/defendant was personally served it is possible to take an in-personam judgment for the deficiency. An in-personam deficiency judgment operates as an unsecured judgment against the mortgagor individually (but as a practical matter, there is little chance of collecting an unsecured judgment against someone who just lost their home).
If the residence is occupied, there is an automatic 30 day stay of possession from the order confirming the sale, after which the county sheriff can then evict the mortgagor. In total, from default to possession, a mortgagee/lender and the mortgagor/borrower is looking at over 10 months of time for this process (30 day notice of default, 30 day summons, 7 month redemption period, and a 30 day stay of possession).
V. Alternatives to the foreclosure sale
At any time up to the redemption date, the mortgagor may payoff the mortgage (either through a refinance or through a sale to a third party). See 735 ILCS 5/15-1603. A mortgagor has the statutory right to reinstate the mortgage by bringing current any defaults up to 90 days after service. See 735 ILCS 5/15-1602 (However, as a practical matter, most mortgagees will accept reinstatement amounts well past those 90 days).
There is also a “special right to redeem” by statute, which takes effect if the mortgagee is the sale purchaser, and the purchase price is less than the judgment amount (with interest and costs up to the date of sale). The mortgagor may then, within 30 days of the confirmation of sale, tender to the mortgagee the amount bid plus sale costs and interest. 735 ILCS 5/15-1604. The drawback to this process is that any deficiency may be taken personally against the mortgagor and it “shall retain the same priority on title as did the mortgage from which it arose.”
If the mortgagor files bankruptcy, Illinois statute specifically references the authority of the bankruptcy court to stay the redemption period, 735 ILCS 5/15-1603(c)(2). There exists some degree of discrepancy as to the effect of the stay post-redemption/pre-confirmation. A Petition filed prior to the expiration of redemption will stay the redemption, and a Petition filed prior to sale will stay the sale, and a Petition filed pre-confirmation will stay confirmation. However, the sale itself is typically deemed the cutoff point for the mortgagor to save the home via bankruptcy under the theory that after the sale, the mortgagor’s interests in the property have effectively been terminated. Finally, a mortgagor may tender to the mortgagee a deed in lieu of foreclosure and be free of any further obligation, provided the mortgagee affirmatively accepts the deed. See 735 ILCS 5/15-1401. If there are other lienholders of record, a deed in lieu is not a practical option for the plaintiff/mortgagee as those interests will not be extinguished via such deed. However, a consent foreclosure operates similarly to a deed in lieu whereby the defendant/mortgagors consent to the entry of the order, and all other parties (junior lienholders, unknown owners and non-record claimants) either consent or fail to object (a junior lienholder also has the option to redeem the superior lien(s) and take title, see 735 ILCS 5/15-1402). The court then “vests absolute title” to the plaintiff/mortgagee and bars all rights to seek any deficiency against the mortgagor.
© Donald P. Shriver, 2006